One Hundred Years of Indebtedness

Gabriel Garcia Márquez, the Nobel laureate novelist most famous for One Hundred Years of Solitude, was native to Colombia. Nonetheless, as a master of magical realism, Garcia Márquez would have appreciated the Republic of Argentina’s recent combination of fact and fantasy.

CAMBRIDGE – Gabriel Garcia Márquez, the Nobel laureate novelist most famous for One Hundred Years of Solitude, was native to Colombia. Nonetheless, as a master of magical realism, Garcia Márquez would have appreciated the Republic of Argentina’s recent combination of fact and fantasy. In mid-June, the finance ministry sold $2.75 billion worth of US dollar-denominated bonds that mature in one hundred years.

No doubt, Argentina’s new government has made enormous progress in short order. President Mauricio Macri’s administration has liberalized international capital flows, allowed the Argentine peso to move more flexibly in the foreign exchange market, worked to rationalize a crazy quilt of subsidies, and created a credible statistical authority from scratch. But there are many more promises to fulfill, including further dismantling of subsidies, trimming the government wage bill at the federal and provincial levels, bringing inflation down to single-digit levels, and making the pension system actuarially sound and fairer to younger people.

The right balance between confronting these issues upfront and setting gradual changes in motion is by no means evident. Coordination between the central and local governments has always been a source of strain especially, and the clock is ticking down to the next election. Making up the output lost in last year’s recession will take some time, a problem made more challenging by the economic dislocations in Argentina’s northern neighbor, Brazil.

Back in mid 2000's, avid investors demanded higher returns. And Wall Street delivered these infamous mortgage packages full of dirt but rated AAA, as a means of achieving yield enhancement. Excess liquidity led to outright malinvestment, ultimately to default and loss.

Today we are witnessing the same attitude towards yield seeking, but performed by cocaine stuffed monkeys armed with kalashnikovs, who shot at the first hint of ANY yield. The amount of default and loss baked into the future is several orders of magnitude greater than subprime crisis. As always over history, this will initiate as a liquidity crunch, and will morph into a solvency event.

Default now is a political choice, whatever the debt to GDP level might be. The human body has a natural obsolescence. Man made assets have much shorter duration. Investing in a bond that will mature over the next three generations is something you wouldn't tell your parents without scaring them to death.

Of course, momentum chasing penguins abound, but all will be slaughtered altogether at the killer whale feast.

Global access to unlimited credit creation makes debt repayment an utopy, as from the universe of competing actors, none of them holds a financial competitive advantage over the others. So everything is about endlessly expanding debt creation to honor old promises. And rolling that mechanism till the end of times. Ponzi per tutti !

I think it's important to explicitly note some basic finance, time value of money here. At 7.9% interest, even if these bonds 100% default after just 20 years, using my trusty HP 17Bii financial calculator, just collecting that $7.90 on a $100 investment for 20 years gives you the equivalent of a 4.8% return, which is good for today. If they last for 30 years, you end up with a 6.8% return, which is excellent. And what's that $100 principle worth today, if you discount it at 7.9% for 100 years? Five cents.

Obviously, a world class economist like Carmen Reinhart knows this, and learned it long ago, but it's worth pointing out explicitly.

I think one of the reasons Argentina might have to do this is to make it look like they are a stable well-run country, that can be relied on 100 years from now. Of course, if it's too far from the truth, it can make them look unrealistic and unserious.

"This is not really a story about a country with a fraught financial history willing to issue 100-year debt. Rather, it is a story about a country able to issue 100-year debt because global investors were willing to purchase $2.75 billion of it. Indeed, they were eager to do so: total tenders for the bonds were 3.5 times the volume sold.

At the end of the day, this is not about the character of the country, the maturity of the debt, or the size of the issue. It is about the coupon rate on the offering, 7.9%"

I think it's important to explicitly note some basic finance, time value of money here. At 7.9% interest, even if these bonds 100% default after just 20 years, using my trusty HP 17Bii financial calculator, just collecting that $7.90 on a $100 investment for 20 years gives you the equivalent of a 4.8% return, which is good for today. If they last for 30 years, you end up with a 6.8% return, which is excellent. And what's that $100 principle worth today, if you discount it at 7.9% for 100 years? Five cents.

Obviously, a world class economist like Carmen Reinhart knows this, and learned it long ago, but it's worth pointing out explicitly.

I think one of the reasons Argentina might have to do this is to make it look like they are a stable well-run country, that can be relied on 100 years from now. Of course, if it's too far from the truth, it can make them look unrealistic and unserious.

Totally outraged Ms. CARMEN REINHART for her comment as it seems she has not made a review of the latest developments in the world order. The IMF, B. WORLD and at the last meeting in Davos, where George Soros was urging everyone to insist on Universal Basic Income. Why ? For the simple reason that now they have realized that they have broken the contract with society and capital has become so distant that an unprecedented social revolt is likely to erupt, hence it is to be avoided. That is why it is not understood how it is that it asks that it deepens more in "the cut of the wage mass of the government at federal and provincial level". It's hard for me to understand that you support and venere a character like Macri, being the worst to govern a country, for his incompetence and his dark behavior. Knowing that this pending of I do not know how many previous causes, plus the surprise gift of the Papeles de Panama. And with the management that takes in something more than a year and a half, already began to arise legal problems. As if all this were not enough, his incapacity makes him take the country in the same way as the terrifying Economy Minister of the last dictatorship, to end in a monstrous default. This man is not qualified to rule a country. Please review your notes and finally correct your note. Thank you.

Above all Gabriel Marquez would have appreciated the irony of a another very corrupt head of state and aspiring dictator in SA selling off those bonds to the very same corrupt banks and other corrupt investors responsible for his ascension. He would also have appreciated the combination of fact and fantasy in your economic analysis of Macri's "accomplishments" to date. When and where will predatory neoliberalism finally go to die? NOT in South America apparently.

I dont understand when you said that "Argentina’s political economy appears headed in the right direction". Are you talking about the 1.5 million of new poor people? Or maybe about a rise of 120% in the price of food? Perhaps, could be about the 500.000 new unemployed workers. Maybe it is just about financial markets. Definitely, no. There is no antecedent of an economy grow up by an average of 8% in a period of 100 years. Maybe you need to recheck the official data about employment, industry, fiscal deficit and how the internal market dramatically decrease. Maybe some economist need to think more about how to improve the life of workers and not just in e profit of a couple of financial companies.

There is nothing magical about debt. Nothing magical about passing debt to the next generation. Without debt banks do not exist. As banks create debt at will it follows debt can only expand, it has to for banks to exisit. Debt default is not important to banks since debt can be replaced. Debt default is waste but all production processes have waste. Debt default is particularly unimportant when the taxpayer underwrites losses directly or indirectly. The only issue is the availability of creditors and guvnts ensure that provision. Only an idiot would play this game which is why we have politicians.

Good article. Central banks in advanced economies need income as well as price tools. They can't help but wreak havoc at home and abroad by working with only prices. That should be one of the great lessons of the past 40 years.

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